The economy beat expectations and added 372,000 jobs in June, an encouraging sign for the labor market’s resiliency as the Federal Reserve tries to bring down inflation by raising interest rates.
The strong report from the Bureau of Labor Statistics Friday morning follows several months of robust job gains, which is some positive economic news that President Joe Biden has touted even as historic inflation cuts deeply into the paychecks of people across the country.
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The unemployment rate also remained at 3.6% in June, matching the ultralow level it was at right before the coronavirus pandemic struck.
“It is a positive report, but it just is one piece in the intricate web of data that we’re going to be watching over the next couple of weeks. Certainly this data could suggest the Fed’s going to, more likely than not, continue along its path,” Brian Marks, executive director of the University of New Haven’s entrepreneurship and innovation program, told the Washington Examiner shortly after the numbers were released.
After the Federal Reserve hiked its interest rate target by a quarter percentage point in March, it later jacked up rates by half a percentage point and then last month took its most aggressive rate hike since 1994 and raised the federal funds rate by three-fourths of a percentage point — a move than is analogous to three rate hikes at once.
The action is designed to slow spending and drive down prices, which are rising at the fastest clip since the early 1980s. The trade-off for dampening prices is that it also slows the economy and can result in the jobs market taking a hit and causing the country to tumble into a recession, a prospect that has become more likely over the past few months.
Biden’s approval ratings have been in a nosedive in recent months as inflation soars. Consumer prices increased by 8.6% in the 12 months ending in May, an unexpected upward lurch at a time when most economists predicted inflation had peaked.
Some economists think the central bank is doing too little, too late, given the relative strength of the labor market and the tenacity of the country’s inflation.
A concerning sign in Friday’s report, though, is evidence that wage gains are slipping further behind inflation. Average hourly earnings were up 5.1% for the year ending in June and 0.3% in that month alone. Consumer prices are not expected to have slowed significantly in June from May’s 8.6%, meaning that real purchasing power is falling off very quickly for many consumers.
Labor force participation remained nearly the same as the month before, at 62.2%.
There are also concerns that the Fed’s actions to tighten its monetary policy could knock the economy into a recession, a prospect that would further imperil Democrats and Biden heading into this year’s midterm elections.
It is a difficult feat for the Fed to pull off a “soft landing” and raise interest rates at a pace that’s brisk enough to drive down inflation while simultaneously avoiding recessionary conditions. Historically, central banks have struggled to do so.
Fed Chairman Jerome Powell himself acknowledged the toughness of his role. He recently said avoiding a recession will be “quite challenging.”
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“We think that there are pathways for us to achieve the path back to 2% inflation while still retaining a strong labor market. We believe we can do that,” Powell said, adding, “There’s no guarantee that we can do that.”
The June consumer price index report is set to be released next week. If it shows that inflation has begun to tamp down, it will be a sigh of relief for the whole country, but if prices remain at or above 8.6%, it will show that inflation is even stickier than thought.
